This is a reprint from the Idaho Department of Insurance Website:
Protecting An Investment
What Consumers Need to Know About Lender-Placed Insurance
Today, consumers use credit to purchase almost everything from appliances to cars. For smaller purchases, like a new TV or washing machine, most credit lenders do not insist that a consumer buy insurance coverage. However, for major purchases like a new home or car, the lender expects the consumer to insure the property against losses. Many consumers do not realize if they fail to purchase the necessary insurance, the lender can buy a policy on their behalf and charge the consumer. This type of coverage is referred to as lender-placed insurance. Lender-placed insurance has become more common in this weakened economy. The Idaho Department of Insurance offers this information to help consumers understand these practices and offers tips to avoid having insurance placed on their property.
What is Lender-Placed Insurance?
Lender-placed insurance is a group policy. An insurer issues certificates of insurance to a bank or mortgage servicer when the consumer’s own insurance policy may have lapsed or if the lender deems the consumers’ insurance to be insufficient.
When a loan agreement is made with a bank or a lender, generally the lending document includes a stipulation requiring property insurance, often referred to as hazard insurance, on the property. The contract will spell out specifically what must be covered and how proof of coverage is to be submitted to the lender or the company servicing the loan. This is why, when insurance is purchased for a home or car, the insurance agent asks if there is a lienholder and the lender’s name appears on a declarations page. If a consumer cannot provide proof of coverage, a lender can ask the insured to place insurance on
the property in accordance with the terms of the lending contract.
A mortgage for a home located in a National Flood Insurance Program Special Flood Hazard Area will require flood insurance. If this is a requirement of the mortgage contract and it is not purchased, the lender can purchase the coverage and require the consumer to pay for it.
Why is it Important to Understand Lender-Placed Insurance?
Lender-placed insurance premiums are higher than the property insurance a borrower can purchase on their own and consumers are billed by the lender for the cost of a lender-placed policy.
A lender will try to verify coverage before it acts to insure a collateral property and will also notify the consumer of the actionto insure the property. Be aware the standard mortgage loan contract allows a lender to secure property insurance back to the date they last show it was covered by the consumer’s personal policy. This could result in a large bill for a more expensive insurance policy.
In addition to being more expensive, the lender-placed insurance policy also has limited coverage. For example, these policies generally do not cover personal items or owner liability. Borrowers could be at risk of foreclosure if they do not pay the lender-placed insurance policy premium.
What Can Consumers Do To Avoid Lender-Placed Insurance?
Paying insurance premiums on time and reviewing the paperwork received from the insurance company and the lender is the most important protection from lender-placed insurance. In the case of a mortgage, the premium for lender-placed insurance can be taken directly from an escrow account. Any change in payment should be an alert to a possible insurance related issue. Many lenders use third-party companies to process payments and insurance information. If paperwork is not processed in a timely manner, or if verification of coverage is mistakenly sent to the wrong address, the lender may not realize the property is adequately covered and secure lender-placed coverage. Check lender information on a policy’s declarations page, and
carefully review all statements received from the lender. If changing insurance companies, be certain coverage between policies is uninterrupted. Also notify the lender of any change and provide proof of coverage directly, instead of waiting for a copy to be mailed from the new insurance company.
Contact the Idaho Department of Insurance with any questions about the use of lender-placed insurance.
Consumers looking for a way to control insurance costs can get smart about their insurance coverages. The NAIC Insure U education program has more about the choices available when it comes to coverage and how to evaluate their needs to find ways to save money on their premiums.
***Insurance Agent’s Note***
If you have ever stopped paying your insurance premium (Auto or Home) there is automatic notice sent to your bank to advise them that the policy is terminated and that the Bank has significant exposure on the loan they have given you. This results in a torrent of mail and phone calls from the bank advising you of the need for insurance. In extreme cases this may result in the revocation of the loan and the item on which it was loaned. (yes you can get your car repossessed in the middle of the night because you haven’t insured it properly) So for heaven’s sake, if you want to keep your car or your house, pay the bill! Often if you allow the policy to terminate you also lose your “prior insurance” history which can result in higher premiums as well. In addition, if the bank has put “forced insurance” on your vehicle the premium is usually about three times the cost of what it was with your insurance company. So that’s not a positive trade off…pay your regular monthly premium now…orrrrr pay three times as much next month!
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